That Disconnected Feeling

A Mississippi company plans to offer local telephone service in Colorado soon, at a price most people would consider a ripoff: $36.50 per month. Despite the high price, however, NOW Communications expects to have thousands of customers, even though US West offers a similar service for as little as $16.91 a month, not including taxes.

"The people who use our service normally don't qualify for phone service because of bad credit," claims Larry Seab, president of the company.

NOW is preparing to advertise its service, which is targeted at people who have had their phones disconnected. Usually those people have racked up large long-distance bills they are unable to pay. What many of them don't realize is that US West is required to offer local telephone service to those who owe money on long distance; US West simply places a block on the line so no long-distance calls can be made from that telephone.

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But many people mistakenly think that if they owe money on long distance, they can't have a phone line, and consumer advocates says companies like NOW are taking advantage of the public's ignorance. They've even dubbed these firms "phone sharks," saying they intentionally exploit low-income and non-English-speaking customers who don't know what their rights are as consumers.

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Dian Callaghan of the Colorado Office of Consumer Counsel says these companies direct their advertising at poor people, students, military personnel and immigrants, a population "who think they have no other option" and who can easily be overwhelmed by long-distance charges. "Long-distance bills can be huge," notes Callaghan. "Many people get disconnected because they don't have the right information."

Earlier this year, the Colorado Public Utilities Commission allowed NOW and other so-called pre-paid providers to begin offering service in Colorado. The PUC commissioners voted 2 to1 to allow the companies into the state, with commissioner Robert Hix casting the dissenting vote. As Hix explained, "The majority's decision will likely inflict additional economic pain on consumers already at the bottom of income distribution. The decision sends the message that this Commission is no longer going to protect the public interests of these low-income and less sophisticated consumers." However, Hix's colleagues said that allowing NOW into Colorado would offer low-income consumers another option for telephone service, and they rejected the argument that the company shouldn't be allowed to operate here.

The Office of Consumer Counsel has appealed the PUC's decision in Denver District Court, arguing that it violates Colorado's 1995 telecommunications law, which prohibits most increases in local residential telephone rates. In the meantime, NOW is free to begin marketing its service.

Seab says NOW will start that marketing on local television stations later this fall. He says that even though US West offers a similar deal at a lower rate, few people know about it, and his company will be able to reach people who now assume they can't have a telephone. "US West does have a program that allows customers who have been disconnected to make installment payments, but the fact is, they don't publicize that," says Seab.

NOW's service will benefit people of modest means who go without phone service, he adds. "We don't require a deposit or a credit check. There's a large number of people without the cash or credit to make a deposit. All they need with us is to make a small connection fee and the first month's payment."

But US West doesn't require a deposit on its toll-blocked lines, either. As long as customers pay their local telephone bill, they can have a US West line, even if they owe money on long-distance.

Seab insists his company's higher charges are justified by the expense of their advertising to reach those who've lost phone service. "Companies like NOW have to charge a higher rate because of the cost in seeking out this market," he says. "We don't get the subsidies the incumbent carriers get from other services. All of the things a traditional customer can do to run up their phone bill -- those services are blocked for a NOW customer. They know exactly what their charges will be each month."

He also claims that NOW has to charge more because of its smaller customer base. He notes that once taxes and other fees are included, the cost of US West's toll-blocked service is closer to $20. "There's not as big a difference in rates as the consumer advocates would lead you to believe," he says.

Companies like NOW have made big inroads into the local telephone market in states such as Florida and Texas, and pre-paid providers now serve more than 500,000 Americans, Seab says. "This is a viable service with a justifiable rate." NOW has 25,000 customers -- most of them in Mississippi -- but has ambitious plans to expand into dozens of new states, and the company will soon open local offices where its customers can make payments. Once those offices are up and running, Seab says, the company will roll out a statewide advertising campaign.

In other states, companies like NOW usually punctuate their ads with exclamation points, promising "No Credit Check! No Contract! No Deposit! No Hassles!"

And that's exactly the problem, says Callaghan.

"NOW's advertising convinces these consumers that NOW is their only option for phone service," she says. "Companies like NOW prey on the unwary, charging exorbitant rates to those who can least afford to pay them."